Motley Fool Inside Value selection Wal-Mart (NYSE:WMT) reported first-quarter earnings Tuesday morning, but I won't spend a ton of time on the numbers. Instead, I want to discuss some of the short-term items surrounding Wal-Mart's quarter, and the company's capital expenditures and free cash flow in general.

One of this morning's big bugaboos: Wal-Mart's warning that higher energy costs will affect its financial performance the rest of the year. This shouldn't shock anyone -- higher energy costs will hit many companies this year, particularly those vulnerable to the price of oil. But I can think of only a few retailers, including Target (NYSE:TGT), that can pass on higher costs without worrying about driving customers away. Energy costs may be a short-term problem for Wal-Mart, but the company's ability to sell goods efficiently matters more in the long run.

Investors have also been fretting about Wal-Mart's inventory management. Inventory did increase at approximately the same rate as sales in the last two quarters of fiscal 2005. However, the company's inventory performance improved this quarter. By historical measures, Wal-Mart's inventory turns, days inventory outstanding, and cash conversion cycle have remained well within its normal range from the last few years.

Lastly, it's worth noting that Wal-Mart was free cash flow-positive (that's cash flow from operations minus capital expenditures) in its first quarter. That rarely happens for the company in its first quarter, when sales and earnings are slowest, yet capital expenditures for expansion remain consistent. Few companies spend on capital expenditures like Wal-Mart does, but few have its potential to open as many stores and convert stores to larger formats, either.

Those capital expenditures make valuing Wal-Mart especially interesting. Like Costco (NASDAQ:COST), Wal-Mart owns many of its buildings, and in some cases the land they occupy, and in turn has fewer leases. Even when it develops a retail site with REITs such as Weingarten Realty Investors (NYSE:WRI), the REIT will sell the portion of the site that Wal-Mart uses to the company upon completion. This makes Wal-Mart's capital expenditures much higher than retailers that lease most of their locations. (It also makes its ROA appear lower, but that's a topic for another day.) On the flipside, Wal-Mart's depreciation appears out of whack with its capital expenditures; land isn't depreciated, and it's not uncommon for buildings to be depreciated over 30 or more years.

Doing a rough cut on the numbers myself, and making adjustments for some of the aforementioned strategic choices that Wal-Mart is making, I'm beginning to like the valuation the market has currently assigned it. With a little more work and validation of my estimates, I might even consider purchasing some shares.

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Nathan Parmelee owns shares in Costco, but has no financial interest in any of the other companies mentioned. Costco is a Motley Fool Stock Advisor recommendation. The Motley Fool has an ironclad disclosure policy .